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Leveling the Playing Field in
Liquidity Management
Solutions For
Participation Banks
Erkan KilimciExecutive Director for Markets Department
2
Outline
Liquidity and Central Bank
Mandates of Central Bank
Balancing banking liquidity
Participation Banks at a glance
Liquidity outlook of participation banks compared to conventional ones
Diagnosis & Remedies
Securities market
Interbank market
Regulatory environment
CBRT’s involvement
3
Central Bank has many tasks for liquidity management.
• Ensuring smooth functioning of payment systems.
• Having an operational structure with sufficient flexibility against unexpected developments in the markets.
• Maintaining the level of short term interest rates within interest rate corridor and around the level determined by the Committee.
• Ensuring that instruments in use to support the efficiency of the monetary policy.
• Ensuring efficient and stable operation of money markets in accordance with the liquidity management strategy.
4
Net liquidity deficit in the banking system is a dynamic process.
Funding Need of the System(FNS)
Changes in Base Money (volume of currency issued +
TL Deposits of Banks)
CBRT operations
Treasury transactions against TL
5
Net liquidity shortage has increased over 2013
Source: CBRT
Funding Need of Banking System
0
20
40
60
80
100
120
012013 072013 012014 072014 012015 072015 012016
Bn
6
Rising TL funding need is a challenge for banks.
Increase in TL Funding Need (2015)
- 53 Bio TRY
Bank A
CBRT FX Sale(2015)
25 Bio TRY
BankC
BankB
7
Participation Banks are not immune to the funding need.
ASSETS LIABILITIES
Cash & Central Bank(RR) 500 Deposit 4000
Securities 1000 Funding 1000
Loans 5000 Capital 1500
6500 6500
CentralBank
ParticipationBank
BankC
BankC
B/S of a Participation Bank
280 TL
100 USD
560 TL
200 USD
840 TL
300 USD
8
Central bank is the lender of last resort if there is a shortage of liquidity.
ASSETS LIABILITIES
Cash & Central Bank (RR) 500 Deposit 4000
Securities 1000 Funding 1000
Loans 5000 Capital 1500
6500 6500
ASSETS LIABILITIES
Cash & Central Bank(RR) 500 Deposit 3160
Securities 1000 Funding 1840
Loans 5000 Capital 1500
6500 6500
9
Outline
Liquidity and Central Bank
Mandates of Central Bank
Balancing banking liquidity
Participation Banks at a glance
Liquidity outlook of participation banks compared to conventional ones
Diagnosis & Remedies
Securities market
Interbank market
Regulatory environment
CBRT’s involvement
10
Asset growth of PBs is slightly higher while the liquid asset growthrate of CBs is negative
TRY Asset Growth
Source:TBB,TKBB
11
FX Asset growth of PBs is quite faster compared to that of CBs
Source:,TBB,TKBB
FX Asset Growth
Source:TBB,TKBB
Participation banks’ TRY liquidity ratio is quite lower compared tothat of conventional banks.
12
TRY Balance Sheet Liquidity
Source:TBB,TKBB
0
5
10
15
20
25
30
35
40
45
50
2010 2011 2012 2013 2014 2015
%
Participation Conventional
Liquidity Ratio: (Cash&Reserves at CBRT+Securities*)/Total Assets
*Securities are overwhelmingly sovereign securities.A small proportion of private securities is ignored
Participation banks’ FX liquidity ratio is higher compared to that of conventional banks.
13
FX Balance Sheet Liquidity
Source:TBB,TKBB
Liquidity Ratio: (Cash&Reserves at CBRT+Securities*)/Total Assets
*Securities are overwhelmingly sovereign securities.A small proportion of private securities is ignored
0
10
20
30
40
50
60
70
80
90
2010 2011 2012 2013 2014 2015
%
Participation Conventional
Participation banks’ overall liquidity ratio is lower compared to thatof conventional banks.
14
Composite Balance Sheet Liquidity
Source:TBB,TKBB
Liquidity Ratio: (Cash&Reserves at CBRT+Securities*)/Total Assets
*Securities are overwhelmingly sovereign securities.A small proportion of private securities is ignored
0
5
10
15
20
25
30
35
40
45
2010 2011 2012 2013 2014 2015
%
Participation Conventional
The share of securities within liquid assets of participation banks is quite lower compared to conventional banks.
15
TRY Liquid Asset Composition
Source:TBB,TKBB
10 12 9 9 11 9
60 60 66 6267 70
30 28 26 2922 21
0
10
20
30
40
50
60
70
80
90
100
2010 2011 2012 2013 2014 2015
% Conventional Banks
HTM Securities AFS SecuritiesCash and Reserves
64
45 38 34 29 24
25
42 52 5453
51
11 14 10 12 18 25
0
10
20
30
40
50
60
70
80
90
100
2010 2011 2012 2013 2014 2015
% Participation Banks
HTM Securities AFS SecuritiesCash and Reserves
The share of securities within liquid assets of participation banks is quite lower compared to conventional banks.
16
FX Liquid Asset Composition
Source:TBB,TKBB
3651
67 74 71 71
38
28
27 19 20 2026 21
6 8 9 8
0
10
20
30
40
50
60
70
80
90
100
2010 2011 2012 2013 2014 2015
% Conventional Banks
HTM Securities AFS SecuritiesCash and Reserves
99 100 96 90 90 88
0 0 4 10 10 12
0
10
20
30
40
50
60
70
80
90
100
2010 2011 2012 2013 2014 2015
% Participation Banks
HTM Securities AFS SecuritiesCash and Reserves
Simple metrics show inadequacy of Islamic securities and lack of essential types of securities that will facilitate a better ALM.
17
Outstanding Sovereign Securities(as of October 31,2015)vs. Banking Sector Assets
Source:TBB,TKBB, Turkish Treasury,Bloomberg
Securities Domestic Bonds Fixed-Coupon CPI-Indexed FloatersDomestic
Sukuk(Fixed-coupon)
Eurobond Eurosukuk
(TRY, Thousand) 432,448,687 248,718,120 99,449,858 84,280,708 6,563,083 155,086,200 10,875,000
Banking Sector Assets
Conventional TRY
Participation TRY
Conventional FX
Participation FX
(TRY, Thousand) 1,053,234,979 73,973,333 626,715,408 45,241,143
Outstanding Securities/Banking Assets*(%)
41.06 8.87 24.75 24.04
Sukuk Gap** 23,765,983
*Conventional securities/Conventional Banking Assets or Islamic securities/Participation Banking Assets in relatedcurrencies** The amount of sukuk needed to be issued to level playing field for IFIs with conventional counterparts)
18
Outline
Liquidity and Central Bank
Mandates of Central Bank
Balancing banking liquidity
Participation Banks at a glance
Liquidity outlook of participation banks compared to conventional ones
Diagnosis & Remedies
Securities market
Interbank market
Regulatory environment
CBRT’s involvement
Deepening capital markets with adequate shariah compliant securities is needed.
19
Problem : PBs do not have sufficient securities in their liquid asset portfolio
Suggestion : A wider pool of securities tradeable in secondary market isrequired
Problem : A mechanism for secondary market liquidity is missing
Suggestion : PD structure and a sukuk yield curve is needed
A more inclusive and efficient interbank market is a must.
20
Problem : Shariah compliant tradeable securities to be used for interbanktransactions is insufficient
Suggestion : Treasury or other public institutions (Eximbank) should issuehigh quality tradeable securities (ie. Ijarah , wakalah and hybridsukuk) of various tenors
Problem : Lack of fund flows among conventional and participation banks
Suggestion : A robust money market platform to facilitate fund flows amongconventional and participation banks should be built.Securities trading and shariah complaint repo like contractsshould be promoted.
Regulatory infrastructure for various contracts must be put in place.
21
Problem : All of required contracts cannot be effectively used.
Suggestion : Regulatory &supervisory bodies and exchange operators shouldadopt various Islamic contracts to make use of different and newshariah complaint products.
Adoption of various contracts and promoting different products will alleviaterisks stemming from lack of adequate shariah compliant liquidiy managementinstruments and increase flexibility for the PBs
CBRT facilitates leveling playing field for the PBs to improve their liquidity management.
22
CBRT has a funding facility for the PBs since 2011 based on buy and sell-backof lease certificates (ijarah sukuk ) issued by Treasury with the right to forsakethe sell-back (unbinding promise by CBRT to sell back securities while the buy-back promise of the PBs is binding)
Adoption of different repo structures like commitment based tripartite repounder BIST and collateralized commodity murabaha is on the way (An efficientorganized commodity market under BIST is required)
The pool of eligible collaterals for CBRT funding is to be widened in time (IILMsukuk, gold, other high quality and liquid assets)
CBRT is one of the shareholders of IILM which is mandated to introduceshariah-compliant liquidity management instruments to the industry.
Available CBRT liquidity facilities and prospective steps
23
CBRT Liquidity Channels
ConventionalBanks
ParticipationBanks
Prospective steps
OMO through CBRT Markets Department
Yes Yes Expanding eligible collateral base
OMO Fundingthrough BIST Repo Market
Yes No Commitmentbased tripartite repo market under BIST
Deposit Facilities Yes No Adoption of various contracts like commoditymurabaha
Thanks…
Erkan KilimciExecutive Director for Markets Department